Public Investment, Tax Evasion, and the Welfare Effects of a Tariff Reform

21 Pages Posted: 29 Mar 2010

See all articles by Manoj Atolia

Manoj Atolia

Florida State University - Department of Economics

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Abstract

Contrary to the case considered in literature, the experience of developing countries indicates that the tariff reforms have not been revenue neutral due to the heavy dependence of developing countries on trade taxes and pervasive tax evasion. In contrast to the plausibility of a welfare loss shown by the current literature, when the adverse effect of the loss of tariff revenue on public investment is factored in, the welfare outcome of the tariff reforms of past few decades turns out to be much more pessimistic. The constraints imposed by tariff dependence and tax evasion imply that future tariff reforms in these countries should be undertaken after strengthening their domestic tax system and augmenting the ability of their governments to fight tax evasion. For countries of sub-Saharan Africa, where such reforms are likely to be concentrated, this would need planning and capacity building over a longer time horizon.

JEL Classification: D61, D62, F13, H26

Suggested Citation

Atolia, Manoj, Public Investment, Tax Evasion, and the Welfare Effects of a Tariff Reform. Contemporary Economic Policy, Vol. 28, No. 2, pp. 219-239, April 2010. Available at SSRN: https://ssrn.com/abstract=1578505 or http://dx.doi.org/10.1111/j.1465-7287.2009.00176.x

Manoj Atolia (Contact Author)

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States
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HOME PAGE: http://mailer.fsu.edu/~matolia/

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